Factors that Facilitate and Impede Cross Border

Payments

Carol ClarkPayments in the Americas

Federal Reserve Bank of AtlantaOctober 7, 2004

Scope of Study

• I. Cross border payments marketplace excluding securities transactions

• II. Detailed information on 16 countries that have considerable ACH volume

• III. Policy issues related to international payments

• IV. Future considerations

Key Points

• Projected growth in cross border payments

• Payment barriers

• Players in global electronic marketplace

• Two cross border payment models

Key Points

• Payment networks are two-sided markets

• Challenges for new payments providers

– Establishing critical mass– Aligning incentives for each of the

payment participants

Projected Growth in Marketplace

• U.S. largest sender of remittance payments in world

• Last half of 1990’s remittance flows to Latin American countries doubled

• Remittances to Mexico, El Salvador, Guatemala, Honduras, Nicaragua will increase from $10.2 billion in 2000 to $18 billion in 2005 (Pew Hispanic Center)

Projected Growth in Marketplace

• Global retail payments projected to grow – 10.2% by 2010 – 7.8% in the Americas (Boston Consulting

Group)• Cross border payments may double 2003-2005

(Unisys, Global Concepts, Talson)• Media attention on providing inexpensive,

reliable remittance services

Cross Border Payment Barriers

• Banks and end users view cross border payments as costly and cumbersome

• Incentives to develop faster and lower cost systems do not exist

• Small payment volumes present challenges to developing critical mass

Global Payments Marketplace

• Marketplace concentrated among a few players

– Financial Institutions

– Non-Bank Providers

– Central Bank or Privately Owned Payment Systems

• Infrastructure costs may drive further consolidation

Two Payment Models

• Correspondent/Network Relationship Model

• Tiered Relationship Model

Correspondent/Network Model

InstitutionA

InstitutionB

Sender Receiver

Bilateral Accounts

Tiered Relationship Model

InstitutionA

Supra-RegionalEntity

InstitutionB

Sender Receiver

Institution Institution

Sender Receiver

Two Sided Markets

Factors that Influence Senders

• Consumer/Business

• Cost

– Proximity

– FX Conversion

Factors that Influence Senders

• Cost

– Timing

– Standards

• Reliability

Factors that Influence Senders

• Financial Literacy

– 58% immigrants do not have bank accounts

– For those with accounts, less than one quarter use them to send remittances

– Documentation concerns

Institution Concerns

• Regulation

• Payment Revenue

Institution Concerns

• Costs

– Technology platform

– IT investment

– Liquidity

Institution Concerns

• Standards

– Interfaces

– Formats

– New Procedures

– STP

Factors that Influence Receivers

• Timing

• Reliability

• Cost

– Proximity

– FX

– Institution

Conclusions

• Concentrated and two-sided market

• High unit costs relative to domestic markets

• Standards vary more than in domestic markets

• Challenges in developing critical mass and aligning incentives

Conclusions

• Regulation may unintentionally and inadvertently impact sender

• Business Case

• Education

Questions?